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| GWDC.OB > SEC Filings for GWDC.OB > Form 10-Q on 20-May-2008 | All Recent SEC Filings |
20-May-2008
Quarterly Report
To capitalize on the growing coffee business opportunities world wide,
specifically China, and to increase future revenue growth of our coffee
business, the board of directors approved a plan to restructure the management
of the company. We now sell coffees from Papa New Guinea, Ethiopia, Jamaica,
and are in the process of developing coffee supply from Columbia. The board's
objective to restructure are to (a) turn the company into a profitable entity
with healthy finances for the benefit of its shareholders; (b) launch new brand
initiatives to better leverage the "Growers Direct" brand name in terms of green
beans, roasted coffee, coffee shops and online sales; (c) allow the company to
work more closely with farmers in various countries to improve supply logistics;
(d) optimizing the established global green bean sale and distribution networks
and; (e) leveraging the "Growers Direct" brand name to pursue roasted coffee
sales opportunities online. We completed our restructure plans during the first
quarter and our new management visited coffee farmers in Columbia to secure
additional coffee supply sources. We are also in discussions with and in the
process of evaluating other green bean supply sources in South America to expand
the breath of green bean coffees we can offer to our existing customers.
Our revenue for the quarter ended March 31, 2008 was $618,602 compared to
$392,612 for the March 31, 2007 quarter. Our sales increased due to the arrival
of the "Penlyne Castle" "Jamaica Blue Mountain" coffees. We have sustainable
demand for our coffees due to our aggressive marketing efforts including hosting
booths at the Specialty Coffee of America exhibition at Minneapolis Minnesota.
The revenue for 2008 fiscal period will see growth as we introduce the
Colombian coffee to our existing customers. The company believes that addition
of Jamaican "Penlyne Castle", Ethiopian and Colombian coffee will generate
increased revenue in 2008complementing the Papua New Guinea ("PNG") bean crop
cycle. We also anticipate growth in revenue from the roasted coffees, increased
revenue generated from our online sales via the website www. Uncommongrounds.net
for Uncommon Grounds Inc. Our gross profit on sales for the quarter ended March
31, 2008 was approximately 25% compared to 45% in 2007. This decrease in
percentage was due to the introduction of the "Penlyne Castle" Jamaican Blue
Mountain coffees. For the remaining year of 2008 we anticipate higher gross
margins and increased revenues by selling our green beans at premium prices.
Our operating expenses for the quarter ended March 31, 2008 were 926,409
compared to 1,145,466 in 2007; a decrease of 219,057. The general and
administrative expenses declined to 630,542 for the quarter ended March 31, 2008
compared to 818,451, marketing expenses also decreased by 31,148 to 295,867 for
the quarter ended March 31, 2008 compared to 327,015 in 2007. The net loss for
the quarter ended March 31, 2008 was 1,199,966 compared to 1,406,706 in 2007.
The losses attributed to common shares issued to consultants, directors and
employees for services recorded at fair market value which aggregated to 497,000
for the quarter ended March 31, 2008 and 547,870 in 2007. For the quarter ended
March 31, 2008 the 497,000 recognized in expenses were 105,000 was charged to
outside services, 160,000 as management fees, 190,000 marketing expenses and
42,000 investor relations. At March 31, 2008 we had 1,086,418 in current assets
and 389,353in current liabilities. Our long term liabilities, March 31, 2008,
resulting from the convertible notes funding was 1,961,487 for convertible debt,
net of discounts. At March 31, 2008, Growers Direct had 505,358 in cash and
deposits which we believe are adequate to meet our operational expenses for
approximately the next twelve months. All revenues generated by the company are
used to pay company expenses and to implement and expand the company's business.
Our revenue of 618,602 for the Quarter ended March 31, 2008 consisted of
367,443 from green bean coffee and 251,159 from roasted coffee. The operating
expenses of 926,409 included travel expenses of 44,008, marketing, advertising
and promotion of 207,287, investor relations of 44,573, professional expenses of
77,722, salaries and related benefits of 87,531, management fees of 250,000,
consulting and outside services of 145,696 and general and administrative
expenses of 69,593. For the quarter ended March 31, 2008 the company expensed
convertible note related expenses: amortization of warrants and original
discounts of 378,830, liquidating penalty of 45,841 and interest expense of
2,742. The net loss for the quarter ended March 31, 2008 was 1,199,966. Our
accumulated losses as of March 31, 2008 were 24,345,107. For the quarter ended
March 31, 2007 our total revenue was 392,612 and incurred a net loss of
1,406,906. Our operating expenses were 970,051 which consisted of marketing
expenses of 327,015 and general and administrative expenses of 818,451. The
general and administrative expenses of 818,451 included travel 45,256,
professional fees 66,134, advertising and promotion 215,916, office expense
368,996 and consulting 121,149. During the quarter ended March 31, 2007, we
expensed convertible note related expenses, financing expenses of 435,855. As
of March 31, 2007, our current assets were 2,374,388 and current liabilities of
313,383. Our long term liabilities at March 31, 2007 resulting from the
convertible note funding, net of discount was 1,770,230.
As of the date of this Report, Growers Direct has not incurred any coffee related research and development expenses and does not plan to incur any research or development expenses in the future.
As of the date of this Report, Growers Direct did not have any off-balance sheet arrangements.
Critical Accounting Policies & Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and (2) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements.
Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. We have identified certain accounting policies that we believe are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Note 3 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-QSB.
Revenue Recognition
The Company derives its revenue from sale of green beans and roasted coffees and allied coffee products. Our revenue is recognized in the period when persuasive evidence of an arrangement exists, delivery occurs, the sales price is fixed or determinable and collectibility is reasonably assured. Coffee is considered delivered when title and risk have been transferred to the customer. Retail and wholesale sales are recorded when payment is tendered at point of sale for retail, and upon shipment of product for wholesale.
Stock Option
At December 31, 2007, the Company has one stock-based employee compensation plan. The stock option plan is for its directors, officers, employees and consultants. Under the terms of the plan, options become exercisable immediately upon grant. All stock options granted to date have been pursuant to separate agreements. The Company has adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment". Under the fair value method, compensation cost is measured at fair value using the Black-Scholes option-pricing model, at the date of grant and is expensed over the award's vesting period. Expected volatility is based on the historical volatility of the company's common stock. SFAS No. 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, and that forfeitures are estimated when recognizing compensation cost. Accordingly, the Company estimated a forfeiture rate of 0% when originally recognizing compensation cost. When estimating forfeitures, voluntary termination behaviour is considered as well as trends of actual option forfeitures. For the cumulative period from April 16, 2007 to December 31, 2007, there have been 1,100,000 options forfeitures and cancellations on voluntary basis. At March 31, 2008, 700,000 stock options for future grant - common stock equivalents were outstanding.
Convertible Note
On March 2007, the Company entered into convertible note agreements with certain institutional and accredited investors for amounts totalling $2,678,571 with an original discount of 16% ($428,571). The convertible notes are repayable on March 19, 2009. The notes are convertible into common stock of the Company, at the option of the holders, at a rate of $0.66 per share. The Company also issued to the holders 3,438,033 stock purchase warrants exercisable at $0.66 per share before March 18, 2010. The warrants may be exercised on either a cash
Fair Value of Financial Instruments
The Company's financial instruments, as defined by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," include cash and cash equivalents, marketable securities, receivables, advances to employees, accounts payable and accrued expenses. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at December 31, 2007 and 2006.
Receivables
Trade accounts receivable are recorded at the net realizable value and do not bear interest. No allowance for doubtful accounts was made during the quarter ended March 31, 2008 and 2007 based on management's best estimate of the amount of probable credit losses in existing accounts receivable. Growers Direct evaluates its allowance for doubtful accounts based upon knowledge of its customers and their compliance with credit terms. The evaluation process includes a review of customers' accounts on a regular basis. The review process evaluates all account balances with amounts outstanding 60 days and other specific amounts for which information obtained indicates that the balance may be uncollectable. As at March 31, 2008, there was no allowance for doubtful accounts. Growers Direct does not have any off-balance-sheet credit exposure related to its customers.
Seasonality and Other Factors That May Affect Our Future Results
(a)
Our business is seasonal in nature because coffee harvest season is from May to August in Papua New Guinea. The seasonal availability of green bean coffee in the second quarter of the year may result in increased sales in the last two quarters. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Furthermore, past seasonal patterns are not necessarily indicative of future results.
(b)
Our business strategy is centered on a single product; green bean coffee. If the demand for green bean coffee decreases, our business could suffer. Additionally, if we fail to continue developing and maintaining the quality of the green bean coffee we sell or the farmers allow the quality of the green bean coffee to diminish, our business revenue and profitability could be adversely affected.
We have only one coffee roasting facility. A significant interruption in the operation of this facility due to natural disaster or other causes could significantly impair our ability to operate our coffee roasting business on a day-to-day basis.
Our roasted coffees compete directly against gourmet specialty coffees sold at specialty retailers, discount stores, and a growing number of specialty coffee stores. Many specialty coffee companies, including Starbucks and Peets Coffee sell whole bean coffees through these channels. The gourmet specialty market contains competitors with substantially greater financial, marketing and operating resources than we have.
(e)
Our ability to continue with our business plan is subject to our ability to continue generating additional revenue. Our ability to continue as a going concern is an issue raised by our auditors in their audit report as a result of our limited revenue and accumulated losses of $24,345,107 as of March 31 2008. There are no assurances that we may be successful in generating any additional revenue. To fund the ongoing operations,
(f)
Our ability to implement the marketing and sales strategy is partially dependent on our ability to increase awareness and recognition of Papua New Guinea and Jamaican grown green bean coffee in United States, Canada and Europe. We may have difficulty selling the Papua New Guinea grown green bean coffee to roaster retailers, commercial roasters, gourmet roasters and retailers, and coffee brokers. Consequently, if we fail to implement our marketing and sales strategy, or if our resources on a marketing and sales strategy ultimately proves unsuccessful, our revenue and operating results may be adversely affected and we may have to curtail or cease our operations. As a result, investors could lose their entire investment.
(g)
We need to manage growth in our operations. Our ability to successfully offer
our products and services and implement our business plan in an evolving coffee
market requires an effective planning and management process. We will need to
continue to improve our financial and managerial controls and reporting systems
and procedures. We expect growth in our business; however, this growth will
continue to place a significant strain on our management systems and resources.
There are no assurances we will effectively achieve or manage future growth,
and the failure to do so could delay product development cycles or otherwise
have a materially adverse effect on the Company's financial condition and
results of operation.
(h)
Our business depends upon attracting and retaining highly capable management and operations personnel. In order to achieve its objectives, the Company must add key people to its management team. We also require highly skilled technical, sales, management and marketing employees who are in high demand and are often subject to competing offers. As we grow, we will continue to need an increased number of management and support personnel. It is possible that we will be unable to recruit the people we need in a timely fashion.
Intense competition may affect our profitability. The markets for our products
are highly competitive and rapidly changing. We face several large competitors
that have been in business longer than we have. These competitors have the
advantage of having entered the market earlier than us. Our competitors and
their products are more fully established and accepted in the market place.
There are a number of other companies offering green bean coffee currently
existing in the market place. These competing companies are already accepted in
the market place. We may therefore be unable to gain adequate market share that
will allow us to meet our financial projections. We cannot assure you that our
competitors will not develop services or products that are equal or superior to
ours or that achieve greater market acceptance. Please see
"Business-Competition" for further detail regarding our competitive market.
(j)
We may need additional capital. We require substantial working capital to fund our business. If we do not generate enough cash from operations to finance our business in the future, we will need to raise additional funds through public or private financing. Selling additional stock could dilute the equity interests of our stockholders. If we borrow money, we will have to pay interest and may have to agree to restrictions on our operating flexibility. The borrowing of additional monies may put a strain on the Company's cash flow and ability to develop and or expand its products and business. There are no guarantees that we will be able to obtain additional financing or that if such financing is available that it will be on terms satisfactory to the Company. See "Management's Discussion and Analysis of Financial Condition and Operations".
Our Industry Related Factors That May Affect Our Future Results
(a)
Competition may adversely affect our ability to implement our business plan. There are other companies conducting similar activities, and the demand for green bean coffee is affected by consumer taste and preferences. With little operating capital in a rapidly evolving and highly competitive coffee industry, we will encounter financial difficulties. The whole green bean coffee market is highly fragmented and coffee brands are being established across multiple distribution markets. Several competitors are aggressive in obtaining distribution in specialty grocery and gourmet food stores. We have only begun to penetrate these markets, which gives some competitors advantages over us based on their earlier entry into these distribution markets. Competition in the green bean coffee market is intense as relatively low barriers to entry encourage new competitors to enter the green bean coffee market. The new market entrants may have substantially greater financial, marketing and operating resources than we may, which may adversely affect
(b)
Adverse weather conditions and diseases may negatively affect the cost of and our supply of green coffee beans. Decreased availability of quality green bean coffee would have an adverse affect on our purchasing costs, revenue and profitability and would jeopardize our ability to grow our business. A significant portion of our anticipated revenue will be realized during the Papua New Guinea coffee harvest season, which is from May to August. Any coffee tree and/or coffee bean diseases and/or severe adverse weather conditions such as a prolonged period of drought, would have an adverse effect upon the supply of quality green bean coffee at a reasonable price, which, in turn, would directly affect our ability to market and distribute green bean coffee in the United States, Europe and Canada. As a result, our business would be impaired, we may have to curtail or cease our operations, and the investors could lose their entire investment.
Political and social instability in Papua New Guinea, Jamaica and Ethiopia may also negatively affect our supply of green coffee beans and our purchasing costs. We purchase unprocessed green bean coffee from Papua New Guinea, Jamaica and Ethiopia. Consequently, any political, economic and social unrest and/or instability in Papua New Guinea, Jamaica and Ethiopia may adversely affect our business operations. In particular, instability in coffee growing regions of Papua New Guinea, Jamaica and Ethiopia could result in a decrease in the availability of quality green coffee beans needed for the continued operation and growth of our business. It could also lead to an increase in our purchasing costs and increased operating costs. This may impair our business, we may have to cease or curtail our operations, and investors could lose their entire investment.
Fluctuations in the price of green bean coffee may impede our marketing ability Green bean coffee is traded on the commodities market. The supply and price of green bean coffee is affected by multiple factors in the various producing countries including; weather, political, and economic conditions. We plan to sell our green bean coffee on a negotiated basis based upon the supply and demand at the time of purchase/sale. The benchmark (beginning) price will be directly tied to the then current prevailing price of New York "C" futures coffee contracts trading on the New York Coffee, Sugar & Cocoa Exchange. If the cost of green bean coffee increases, we may not be able to pass along those costs to our customers because of the competitive nature of the coffee industry. If we are unable to pass along increased coffee costs, our margins will decrease and profitability will suffer accordingly. As a result, our business will be adversely affected and we may have to curtail or cease our operations and the investors could lose their entire investment.
(a) There are a large number of shares underlying the Notes. As of March 31, 2008, we had 35,013,992 shares of common stock issued and outstanding. There are currently Notes outstanding that may be converted into an estimated 6,350,584 shares of common stock at current market prices and outstanding warrants to purchase 3,678,695 shares of common stock. All of the shares, including all of the shares issuable upon conversion of the notes and upon exercise of our warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock.
(b) The issuance of shares upon conversion of the Convertible Notes and exercise of outstanding Warrants may cause immediate and substantial dilution to our existing stockholders. The issuance of shares upon conversion of the Notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholders may not convert their Notes and/or exercise their Warrants if such conversion or exercise would cause them to own more, than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholders from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholders could sell more than this limit while never holding more than this limit.
(c) Repayment of the Notes could negatively affect our supply of working capital. On March 19, 2007, we entered into agreements to issue the Notes. The Notes are due and payable March 18, 2009, unless sooner converted into shares of our common stock. The Company cannot voluntarily pre-pay the Notes until March 18, 2008. In addition, any event of default such as our failure to repay the principal or interest when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Subscription Agreement or related convertible note, the assignment or
(d) Management owns a substantial majority of our common stock and that may reduce your ability to influence our activities. Prior to this Offering our officers, directors collectively owned approximately 14% of our outstanding shares of common stock as of December 31, 2007 and if all of the underlying shares being registered hereby are acquired by the Note holders, our officers and directors will collectively own approximately 11% allowing these security holders to control matters requiring approval of our shareholders. Such concentrated control of the company may adversely affect the price of our common stock in that it may be more difficult for Growers Direct to attract investors because such investors will know that our officers and directors will likely decide matters requiring shareholder consent. Our officers and directors can control matters requiring approval by our security holders, including the election of directors. Moreover, if our officers and directors decide to sell a substantial number of their shares, investors will likely lose confidence in our ability to earn revenue and will see such a sale as a sign that our business is failing. Each of these factors, independently or collectively, will likely harm the market price of our stock.
(e) We have discretion as to the use of proceeds. In conjunction with the sale . . .
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